Reeds Inc

Good morning and welcome to REIT's third quarter 2024 earnings conference call for the three months ended September 30, 2024. My name is Angeline and I will be your conference call operator for today. We will have prepared remarks from Norman E. Snyder, REIT's Chief Executive Officer, and Joan Tinnelly, REIT's Chief Financial Officer. Following the remarks, they will take your questions. Before we begin, please take note of the company's cautionary statement. Today's call will include forward-looking statements, including statements about REED's business plans and 2024 guidance. Forward-looking statements inherently involve risks and uncertainties and only reflect management's view as of today, November 14, 2024, and the company is under no obligation to update them. When discussing results, the presenters may refer to non-GAAP measures which exclude certain items from reported results. Please refer to Reed's third quarter 2024 earnings release on Reed's investor website at investor.reedsinc.com and its third quarter 2024 form 10Q expected to be available on the website soon for definitions and reconciliations of non-GAAP measures and additional information regarding results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements. I will now turn the call over to Mr. Snyder.

Thank you, operator, and good morning, everyone. We appreciate you joining us today to discuss our third quarter 2024 results. We experienced strong order demand from our retail partners in the third quarter. However, production limitations and short shipments impacted net sales by more than $4 million. These persistent inventory challenges, although materially reduced during the second quarter, reemerged in Q3 due to restricted working capital. More specifically, our reduced collateral base limited our liquidity and affected our ability to purchase inventory. Our internal modeling projected an asset back line utilization of over $8 million. However, because of collateral restraints, our borrowing was capped at approximately $5 million. In response to this limitation, We intend to close on a one-year revolving credit facility today with one of our trusted long-term partners, White Box, for an aggregate principal amount of $10 million. This capital offers more favorable and flexible terms that align with the needs of our business. We intend to use this capital to pay off the balance of our existing revolving line of credit and build our finished goods inventory levels to reduce short shipments and alleviate production challenges. We've struggled with our balance sheet and building inventory for an extended period. While we fully recognize the repetitive message of short shipments and production challenges, the reality is that we now truly have a deleveraged balance sheet and the funding that we need in a structure that allows us to properly utilize the capital in a way it was intended. And as a result, we can finally build inventory back to appropriate levels to meet our retail order demand. Now let's dive into the quarter. We have made progress on our new line of Better For You beverages featuring organic ginger, adaptogens, lower calorie and sugar content. These products are in the final phases of development and have already been presented to key retailers. The feedback is positive, and we've incorporated much of this feedback into the final product. By using premium natural ingredients, we plan to deliver the bold taste our brand is known for while expanding into this innovative high-growth refreshment category. This functional beverage line will complement our core products and contribute to our return to growth. We expect to launch this line of products to select customers early next year. An anticipated reaction is why enter a relatively new category when you're struggling to meet current demand with our existing portfolio. Over the past year, we have closely collaborated with our key retail partners, many of whom have shared plans to significantly expand shelf space for the functional and better for you segment. Our ginger-based product line aligns perfectly with this growing category, offering plant-based ingredients, proven benefits, great taste, and a healthier profile. We expect to secure multiple authorizations for 2025 soon. Turning to our third quarter and recent sales and operational highlights. In Q3 and into early Q4, our sales team has been successfully expanding our assortment throughout the retail landscape. Safeway Albertsons has authorized flying calls across its own banners and has approved a national secondary display on the item beginning in February 2025 with expected new points of distribution exceeding 1,800. Giant Eagle has listed seven new items, bringing over 1,100 new points of distribution with resets happening in stores now. National Grocers Vitamin Cottages has added five new SKUs, adding over 800 new points of distribution beginning in February 2025. Harris Teeter has authorized two new items from our Virgil's Can portfolio, delivering 500 new points of distribution, with resets in progress now. Cracker Barrel has approved our extra ginger beer in our half liter swing lid format, bringing over 500 new points of distribution, with distribution going live now. Giant Foods and Lowe's have both authorized our classic meal and distribution is already active. In aggregate, the team has amassed over 5,000 new points of distribution, which will help propel us into 2025. To enhance our logistical efficiency and provide consumers with our products at the most affordable price, our sales team has secured both national and regional approvals to transition from four-pack glass to four-pack cans across both the Reed's and Virgil's portfolios. Key authorizations include national acceptance by Whole Foods for Virgil's root beer and vanilla cream and Safeway Albertson's approval of Virgil's root beer cans nationally. Next week, we are introducing our new ginger ale winter variety pack in Costco. This exclusive pack features a trio of flavors, our classic ginger ale along with cranberry and blackberry flavored ginger ales. This seasonal pack is perfectly timed for the holidays, giving Costco shoppers more festive choices, and ginger ale beverages. We are pleased to offer these additions and look forward to further expanding our product lines and strengthening our collaboration with Costco. As described briefly on our last call, our team has been busy landing and executing placements on our half liter glass seasonal items. Retailers that authorize these items include Whole Foods, Kroger, and Wegmans, with other previously mentioned retailers have an active distribution as we hit peak seasonality. We are gaining momentum in our e-commerce channel with monthly sales exceeding $70,000 for the past two months. This growth reflects our targeted digital strategies and the increasing consumer demand for convenient online purchasing options. Based on these trends, we project that e-commerce will generate over a million dollars in sales in 2025. While this represents a small portion of our business today, we are optimistic about its progress and will continue to invest resources as it becomes a larger revenue contributor in the future. Our co-packer network is now solidified in geographic locations that are conducive to optimizing network freight efficiency. With the activation of battle coal packing in the southeast for bottles and cans and drink pack in SoCal for cans, we now have full coverage for both bottles and cans for 2025. Turning to a recent strategic update, we are encouraged by the decisive steps we've taken to improve our balance sheet and liquidity position. On October 23rd, our largest shareholder, D&D Source of Life, purchased from White Box all of our outstanding secured debt. This investment, paired with the additional funding from our long-term partner, White Box, is a strong vote of confidence in our business and its potential. To complement these strategic actions, we've appointed Sam Vann to our board being an extensive expertise that will enhance our ability to create value for both shareholders and customers. Sam's background in capital markets, business development, and regulatory compliance includes leadership roles at the New York Stock Exchange, FINRA, and Global Markets Advisory Group. Throughout his career, he has facilitated over 100 company listings on U.S. exchanges and has served on the boards of Phoenix Motor Inc., Realm Insurance, and Dell Tech Investment Advisor. We're excited to welcome Sam to our board and look forward to his contributions to our team. Following Sam's appointment, we announced the departure of three board members, John Bello, Lewin Brogno, and Tom Kopsar. I'd like to extend my gratitude to each of them for their dedicated service and reach throughout their respective terms and wish them all the best in their future endeavors. As a result of the inventory challenges faced year to date, we are withdrawing our previously issued full year 2024 outlook. However, With this recent capital infusion and delivered balance sheet, we are now better positioned to build back inventory levels, fulfill demand, and drive towards our goal of sustained growth and profitability. Before wrapping up closing remarks, Joanne will cover the financial highlights for the quarter in more detail. Joanne, over to you.

Thanks, Norm. Diving into our results, all variance commentary is on a year-over-year basis unless otherwise noted. Net sales for Q3 2024 were $6.8 million, compared to $11.9 million in the year-ago quarter. The decrease was primarily driven by tightened credit terms from several suppliers, coupled with a reduced collateral base that restricted liquidity and impacted our ability to purchase raw materials, which offset net sales by approximately $4.4 million in the third quarter of 2024. Gross profit for Q3 2024 was $1.2 million, compared to $4 million in the year-ago quarter. the gross margin of 18% versus 34% in the year-ago quarter. The decrease was primarily driven by higher trade spend contributing to lower net sales, as well as increased cost of goods sold as a percentage of net sales. Delivery and handling costs were reduced to $1.3 million during the third quarter of 2024, compared to $1.9 million in the third quarter of 2023. Delivery and handling costs were 19% of net sales, $2.99 per case compared to 16% of net sales or $2.98 per case during the year-ago period. This increase in the cost per case spend was driven by out-of-network shipments due to inventory availability. Selling, general, and administrative costs were $3.1 million during the third quarter of 2024 compared to $2.3 million in the year-ago quarter. Altogether, operating expenses were $4.4 million compared to $4.2 million in the year-ago period. Operating loss during the third quarter of 2024 was $3.1 million, or $0.62 per share, compared to $0.1 million, or $0.03 per share, in the third quarter of 2023. Modified EBITDA was a loss of $3 million in Q3 2024 compared to $0.2 million in the year-ago period. For the third quarter of 2024, we generated approximately $1.1 million of cash from operating activities compared to cash used of $1.8 million for the same period in 2023. The increase was primarily driven by lower inventory purchases compared to the year-ago period. As of September 30, 2024, we had approximately $0.3 million of cash and $27.1 million of total debt net of capitalized financing fees. The debt includes $21.8 million from the convertible note and $5.4 million from our revolving line of credit, which has $7.5 million of additional borrowing capacity. These figures do not reflect the subsequent transactions related to Whitebox and D&D, which was discussed by Norm. I will now turn the call back to Norm for closing remarks.

Thanks, Joanne. Over the past year, we have worked diligently to optimize our cost structure and build a solid foundation to support our future growth. With our new $10 million revolving credit facility, the purchase of all the secured notes held by White Box by our largest shareholder, and the continued strong demand for REITs products, we believe we now have the capital and runway we need to properly execute on our 2025 plan. Operator, we will now open the calls for Q&A.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star button followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Sean McRowan from Roth Capital Partners. Please go ahead.

Good morning. Thank you. I have a couple of questions, Norm. How quickly would you be able to access this new line of capital, and how quickly would it be able to actually translate into additional revenue?

Good morning, John. We'll have access to that today. We finalized all the documentation today, yesterday afternoon into the evening and expect to close shortly after this call. One of the, I think one of the anticipation of this, we've worked hard with our key vendors and retailers to try to get the process started. So we've begun building and shipping inventory. And it's not gonna happen overnight, but I see, and the real goal is to be fully stocked by the end of this year, so we start 2025. with a full assortment on inventory on both coasts so we can meet order demand and ship it within the established shipping orbit.

Okay. How confident are you then that you'd be able to hold on to the listings that you currently have?

You know, that's something that we've worked really hard behind the scenes. communicating with key retailers and being really transparent about our situation. So I believe we'll be able to hold on to it. I mean, obviously we're expanding current authorizations with retailers. I think we have a very short leash and we have to deliver, but I'm confident we've done that. Like I've said, we've been proactive in terms of communication and then how we've really distributed short shipments in terms of managing it. We protected certain customers around promotional periods. And I guess, I don't know if share the wealth is a good term, but we've kind of spread or shared the pain. And so it's not a constant for one or several retailers, but really tried to manage the process. And like I said, been very transparent. and have communicated our plan and what we expect for 2025. Okay.

You may have said it, and I missed it in prepared remarks, but how is the RTD product doing, the alcohol?

Early last year, we scaled back our distribution to retailers that consumers know the REITs portfolio. and really focus on that and growing it. We've had success in those locations. And as a result of that success, we continue to build distribution. And I think I just mentioned, too, in my remarks, Lowe's and there was one other where we just picked up that distribution. But, you know, we've continually had with existing retailers that obviously have had success with with Reeds and are building on that. So it's a slow build. Obviously, we don't want to expand too quickly and use success to build on success. Giant Foods was the other one. And I've seen progress that way. So it's been a slow build, not a big rollout, but we think it's the prudent way to do it. And we're managing our resources well, but also having success on which we can build.

Okay, and a question for Joanne. Does the GMA line in this quarter include any expenses that are kind of one-time or not likely to recur?

This quarter, no.

Okay, so I was a little surprised to see it go up as much as it did. What drove that increase?

Just some general expenses, some additional consultants for... Sean, the other thing is, last quarter, we reversed out some accruals, which drove that a little bit lower. So it's not truly an apples-to-apples comparison. Okay. If you take those adjustments out, you'll see that our trends of our costs have continued to come down.

Okay. All right. Thank you. That's helpful.

Thank you. There are no questions at this time. I will now turn the call over to Mr. Snyder for closing remarks.

Thank you. I'd like to thank everyone for participating in this morning's earnings call, as well as our employees, customers, and, of course, our shareholders. We appreciate everyone's support. We look forward to providing an update when we report our fourth quarter and full year 2024 results early next year. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.